Gartner Sees Only Marginal Growth In 2003 European IT Budgets
New Industry Dynamics Set to Drive Recovery in 2004
European IT Budget Survey shows marginal growth in mean 2003 budgets
Survey shows nearly 75 percent of budgets have stayed the same or increased
Discretionary spend has almost disappeared
Key industry dynamics aligning for 2004 tech expenditure recovery
Vendors regain negotiation control in 2004
Significant PC replacement set for 2004
Wireless goes mainstream in 2004
Linux and Windows gain true Enterprise Credibility
Web Services momentum grows
Gartner Symposium/ITxpo Florence, Italy, 10 March 2003 — While European organisations have seen a marginal average increase in IT budgets in 2003, most do not anticipate substantial growth in 2004, Gartner said today at its European Spring Symposium/ITxpo conference in Florence. 420 respondents from nine vertical sectors across seven European countries took part in the annual Gartner 2003 IT Budget Survey in Europe. Some respondents reported that unspent IT budget was retrieved for use elsewhere in the organisation in 2002, ending the traditional fourth quarter "budget flush", where unused budget is spent to protect budget levels for the next fiscal year.
Taking stock of the global industry more widely, however, Gartner Chairman and Chief Executive Michael Fleisher commented, "Key vendor, industry and technology dynamics indicate a strong possibility that 2004 will see a slow recovery, as demand begins to exceed supply again. The current supply-side over-capacity in the marketplace will begin to wane throughout 2003, along with end-users' advantageous bargaining position. This will be driven by further vendor consolidation, reaching a peak late in 2003. Consequently, pricing power will return to the vendors in the majority of technology sectors."
On the demand side, Gartner predicts that current delays in replacing the ageing installed hardware and software base will not be able to continue. Maintenance costs will soon be higher than replacement costs and this, together with price/performance improvements, will drive a significant replacement cycle in 2004.
Main Survey Findings
This year's survey found a slight increase over last year's in the percentage of respondents whose IT budget had grown or stayed the same. This broadly reflects the generally depressed but stable health of IT spending that has been in place over the last two years.
While visibility of 2004 budgets is still cloudy, some 58 percent of respondents, at this stage, expect their budgets to stay the same.
"While overall European IT budgets are generally stable, " said Peter Sondergaard, Group Vice President and Head of European Research at Gartner, "The new phenomenon we are seeing is that of CIOs not being allowed to spend the whole budget. This variance between budget and actual spend has resulted in an invisible net reduction in some IT budgets."
Sondergaard's comments were supported by the survey data which showed that nearly a quarter of respondents said they had not spent all of their 2002 IT budget. Of this group, the average respondent said they would only spend approximately three-quarters of the budget.
The slow death of discretionary expenditure
Gartner has also observed that continued downward pressure on budgets has been exacerbated by the maintenance requirements of IT investments made in the late nineties. "The combination of slack budgets this year and next, the need to replace outdated hardware and software, and the maintenance overheads from boom-time investments, is leaving CIOs with almost no discretionary spend. CIOs will need to cut out at least 10 percent of older inefficient IT environments to create any discretionary spend in 2004", added Sondergaard.
Tech spend growth — but not yet
While the IT Budget Survey included all relevant spending, including internal staff, technology spend and the use of external support, Gartner also offered guidance on the prospects for technology expenditure in particular.
It announced that the next eighteen months will see a number of shifts in industry dynamics, positioning the technology sector well for increased growth in 2004. However, Gartner cautioned, that while the omens look promising, this recovery will ultimately be determined by the health of the global economy and the effect of geo-political uncertainty.
The re-aligning of supply and demand forces, which have yo-yoed since the mid-nineties, will largely drive this growth.
Vendor consolidation throughout 2003 will end the current gross over-supply of products and services, while product innovation and improved price/performance will kick in by 2004, spurring demand. Assuming the general good health of the global economy and confidence in the geo-political environment, the confluence of these two trends will drive significant growth in technology expenditure in 2004, but not before.
In particular, the following trends will emerge during 2003 and into 2004:
2003 is the last year for customers to negotiate from strength. Power will shift in 2004 from the customer back to the vendor, driven by further vendor-consolidation in 2003. Many smaller or non-critical vendors will either run out of venture capital or be bought in 2003. Surviving vendors will then use this to "churn and burn" their installed bases in 2004, marking the beginning of the end of the current trend for "price wars", with a few exceptions. Customers should be prepared for possible forced upgrades and price increases in 2004, particularly in the hardware and software space.
2004 will see the next major PC replacement cycle. 2003 will not see a major corporate and government-level PC replacement effort, as the installed base is still young enough to perform adequately and the incremental gains in price/performance are not compelling enough. By 2004, however, standard PC features will offer significant price/performance benefits over current offerings, including built-in wireless functionality and hardware base security. The Total Cost of Operation and ownership of these devices will also be exceptionally low. Lastly, by 2004, the installed base will be definitely too old, triggering a major replacement cycle.
Wireless will enter "corporate mainstream" in 2004. The accelerating focus on mobility and enterprise efficiencies, near-term return on investment on wireless expenditure and a relentless push by vendors virtually giving away wireless technologies, are converging to create one of the most significant shifts in 2004. It will be increasingly difficult to buy a corporate grade PC in 2004 that is not wireless-enabled as standard. This extra functionality will be offered at minimal or no extra cost. Ubiquity together with the ability to drive costs down will fuel a significant uptake of wireless technology in the corporate marketplace during 2004. A key application driving this, and supporting Gartner's views around the nature of the Real Time Enterprise, will be Instant Messaging technologies.
Linux and Windows will gain true enterprise credibility. After years of trying, both environments will be good enough for enterprise applications for the first time and will move from the "edge" of enterprise server systems to the core. This will lead to large and accelerating price-performance gains and is one of the few sectors that will not see an end to price wars.
Architect for Web Services now. End-users should begin thinking now about how to re-engineer their IT systems to take advantage of the significant future benefits of a service-orientated architecture. Benefits such as improved speed, cost, robustness and scalability. However, beware of vendors bearing false promises! Web Services will not improve end-users' businesses in 2003. Time spent now, thinking through the architectural issues will bear dividends later in 2004 and beyond.
Services sector continues growth — but slower and often funded "off balance sheet". Business not technology drivers, such as the need to re-engineer business processes, will continue to drive services growth, particularly in the Financial and Government sectors. However, the increasing prevalence of public-private partnerships and long-term outsourcing deals will often result in an initial decrease in budgets due to highly-structured contracts. Smaller financial institutions will increasingly turn to outsourcing to spread the large costs of replacing ageing core systems. Governments with "E-Government" targets but constrained public finances will also stagger their costs in this way. Industry-focused "aggregators", niche specialists and quality offshore service providers will thrive, but generalist IT services providers will be squeezed hard.
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